Major Lending Changes Impact Mortgage Market

July 18, 2017

Changes from the three major credit rating agencies, Fannie Mae, and Freddie Mac will impact mortgage lending and the ability for borrowers to secure loans. Equifax, TransUnion, and Experian announced they will drop tax liens and civil judgements from consumer profiles when the information is not complete. Fannie Mae and Freddie Mac are raising their debt-to-income ratio limit to allow borrowers with higher levels of debt to qualify for conventional mortgage financing.

Approximately 7% of the 220 million Americans with a credit profile have tax liens or civil judgments against them. A potential borrower with a tax lien or civil judgement is considered a significant risk. When the tax lien or civil judgment is incomplete, missing the person’s name address, date of birth, or social security number, this can lead to misrepresentations or mistakes, dropping the FICO score by 20 or more points.

The potential borrower’s debt-to-income ratio also influences their ability to secure a loan and a favorable rate. By raising the debt-to-income ratio limits, Fannie Mae and Freddie Mac help potential borrowers who may have high levels of student debt making it harder to obtain financing. Fannie Mae Chief Economist Doug Duncan does not believe this action will pose a risk, stating, “given how pristine credit has been post-crisis, we don't feel that is an unreasonable risk to take."

Since the Financial Crisis, the housing market has recovered and strengthened with low rates and conservative lending restrictions. As Americans’ borrowing and spending habits improve, easing credit standards may help increase mortgage market activity.